China May Invest Tens of Billions of Euros to Assist Europe, Academic Says

By Bloomberg News -
Feb 8, 2012

China may “move shortly” to help
Europe resolve its debt crisis by providing an investment of as
much as 100 billion euros ($132 billion), said Yuan Gangming, an
economist at the Chinese Academy of Social Sciences.

The money would probably go to the European Financial
Stability Facility, the euro bailout fund, said Yuan, adding
that the forecasts are his own and don’t necessarily represent
government plans. Economists from the academy provide policy
advice without direct involvement in decisions.

Helping Europe is like “hitting two birds with one
stone,” Yuan said in an interview in Beijing Feb. 6. The action
would have many benefits and few drawbacks, Yuan said.

China, sitting on the world’s largest foreign-exchange
reserves at more than $3 trillion, has signaled a stronger
willingness to aid Europe, which is the largest market for its
exports. Chinese Premier Wen Jiabao traveled with German
Chancellor Angela Merkel last week to Guangdong province, a hub
for factories making electronics, shoes and toys for export, and
said there that helping Europe would be helping China itself.

The euro traded near an eight-week high on speculation
Greece is making progress on measures to secure international
aid. The currency rose less than 0.1 percent to $1.3269 against
the dollar as of 4:08 p.m. in Tokyo.

China may initially invest tens of billions of euros and
later increase the amount to 100 billion euros or even more,
said Yuan, who is also a researcher at Tsinghua University’s
Center for China in the World Economy. Another option is for
funds to go toward the International Monetary Fund’s bailout
program, he said.

Benefits for China

Providing funds will help stabilize the crisis while
allowing China to reap investment returns, improve its image and
give it greater say in European and global financial talks, he
said. Greek Prime Minister Lucas Papademos is currently
negotiating terms for a rescue package for his nation as
European leaders seek to limit contagion.

China’s investment will be “meaningful” to the market as
it will ease concerns about debt default and shore up confidence,
Yuan said. “It will also be a safe investment because European
nations remain rich. They’ve just borrowed too much and run into
temporary funding difficulties.”

Yuan said he read Wen’s comments from Merkel’s visit as
showing a Chinese government that was more willing to
participate in aiding Europe. Wen didn’t, as he had in the past,
link the desire for Europe to recognize China as a full market
economy with the nation’s willingness to help, Yuan said.

Merkel’s visit “broke a deadlock,” he said.

Wen Remarks

In September, Wen said at the World Economic Forum’s
session in the Chinese city of Dalian that the nation was
willing to help and added that Europe should recognize China’s
market economy status before the 2016 deadline set by the World
Trade Organization. “To show one’s sincerity on this issue a
few years ahead of that time is the way a friend treats another
friend,” Wen said at the forum.

Later in November, Vice Finance Minister Zhu Guangyao told
reporters at a meeting of Group of 20 nations’ finance ministers
that it’s “too soon” for China to discuss further bond
purchases from Europe’s revamped rescue fund.

Speaking beside Merkel at a press briefing on Feb. 2 in
Beijing, Wen said solving the European debt crisis was
“urgent” and called for greater international cooperation.
China is investigating how it can “be more deeply involved” in
helping solve the crisis, he said.

2009 Forecast

Yuan was quoted by China Daily in March 2009 as saying
China may offer $100 billion in additional funding to the IMF to
help fight the financial turmoil at the time. China signed an
agreement with the IMF later in the year under which the nation
would buy up to $50 billion of bonds that the fund would issue
to member countries.

Fitch Ratings said today that Wen’s remarks during Merkel’s
visit reflect the desire to keep diversifying holdings away from
U.S. Treasuries in China’s foreign-exchange investment portfolio.

Still, it may be “politically unattainable” for the euro
zone to rely on outside bailout funds as the region has
“sufficient” resources within its own territory to tap, Tony Stringer, managing director of global sovereigns for Fitch, told
reporters today at a briefing in Beijing.

China may suffer paper losses on a “large slug” of
investments in the EFSF if Fitch downgraded its rating for
France, which would affect the fund’s rating, he said.

Fitch lowered the outlook on France’s AAA rating in
December, while Standard & Poor’s stripped France of its top
rating last month. If the bailout fund has to pay higher
interest on its bonds, it may not be able to provide as much
funding for indebted nations.